When the trains break down, your drinking water turns brown, your flight gets canceled due to airport construction, or your power or internet goes down, these are just a few examples of infrastructure in need of capital to improve it. I always wondered, who or what put up the capital to keep the world’s essential services running? I later realized that much of it was funded through private capital via infrastructure private equity. I’ve thoroughly enjoyed my time working in infrastructure PE and wanted to share a few tips on learning about infra PE to prepare yourself for interviews and discussions with infra investors.
- Start in a job that is a common pathway to infrastructure PE
- The pathways to working in infrastructure PE can be a bit more varied than the typical banking route. While I started my career in natural resources investment banking before infra PE, below are a few career paths that would give you the best chances of breaking into infra PE with a solid background in the types of assets you would be investing in.
- Investment Banking (specifically natural resources / energy / power groups)
- Project finance: this focuses on the debt side of deals and helps with general understanding of financing (e.g. debt and equity required to fund acquisitions)
- Real estate: many infra companies are REITs and understanding real estate investing is helpful for understanding investing in other real assets. Real estate also sometimes deals with constructing assets from scratch which is also true of some infrastructure investing
- Industry jobs related to energy/telecom/water/transportation: these are some of the typical infra industries that you would be investing in. Exposure to the financial considerations in these industries is a plus
- Understand typical infrastructure investment criteria
- The definition of infrastructure can vary depending on the type of fund you’re working at. However, there are a few fundamental characteristics that infrastructure investors use when evaluating new investment opportunities.
- Essential service: companies in industries that are essential services (power, water, telecom, environment, transportation, healthcare, etc) are attractive to infrastructure investors because they are services that everyone needs and are more permanent than other industries. This is a key principle behind infrastructure investing
- Stable cash flows and low volatility: infra investments need to be lower risk in order for investors to be ok with yielding lower returns than traditional PE investors (infra returns are usually around 10-20% IRR while traditional PE aims for 20%+ IRR). Stable cash flows and low volatility imply lower risk
- Inflation linked: infra companies usually have some sort of long-term contract to provide their service to customers that is linked to an escalator (CPI, PPI, fixed rate, etc). This ensures protection against inflation and prevents passing unnecessary costs to customers (resulting in higher customer stickiness and more stable cash flows)
- Barriers to entry: industries that breed strong competition or business models that are easy to replicate would not be a good fit for an infra investor
- Defensive / downside protected: assets or industries that are protected against recessions, or even better, become more essential services in downturns, are prime targets for infra investors. Infra investments have low correlation with other asset classes, making them safer investments when other asset classes take a dip
- Strong cash yield: infra investors often look for this to provide dividends payments to the investor throughout the hold period
- Know the different types of infrastructure investment strategies
- Different funds in the space will take on different investment strategies. The common strategies are core, core plus, value add, and opportunistic.
- Core (Low Risk, Low Return): Core investments are stable assets that have little growth opportunities and revenue is largely based on contractual cash flows. These investments yield an IRR of ~6-10%. Investors would choose this strategy if they are looking for stable assets with long-term, reliable revenue without taking on much risk. Public private partnerships (PPPs) can also be included in core investments.
- Core Plus (A Little More Risky): This investment strategy targets assets that are at an earlier stage with more growth potential (e.g. an asset in an emerging market or with some expansion potential). These assets require more management than core investments, so investors take on slightly more risk. Typical IRR for core plus investments is 9-12%. Investors plan to hold the asset for 6+ years and maximize value at their exit.
- Value-add (More Risky): Value-add investments require a significant amount of operational improvements and sometimes a full reconstruction of the business model. These assets also have substantial growth opportunities in the business plan – investors may pursue more innovative growth strategies than core/core plus investments or look for transformative M&A. Hold periods are typically 5-7 years and returns are around ~15%.
- Opportunistic (Riskiest): These are investments in assets that are in process of being constructed (e.g. greenfield) and may not have a reliable revenue stream yet. Opportunistic assets are risky investments in the infra space, so the extra risk can command an IRR of 15%+. Investors rely on high growth in these investments to maximize exit in 3-5 years. This is the closest infra investment strategy to traditional PE.
Sources: General knowledge, Wall Street Oasis, Banking Prep
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